“High-yield investment program” can refer to a legitimate investment strategy pursuing high growth, but is more commonly associated with scams such as Ponzi schemes. Financial advisors should avoid using the term due to its negative connotations.
“High-yield investment program” is a term that can be used as both a promotional phrase and a critique. From a promotional perspective, it can simply refer to an investment strategy that favors high risk in the hope of high return. More commonly, however, “high-yield investment program” is a negative way of describing investment schemes that are poorly designed and unsustainable at best, and fraudulent at worst.
Theoretically, a high-yield investment program could simply be a set of investments made with the strategy of pursuing high growth, for example, through volatile stocks or bonds that pay high interest rates but are considered vulnerable to default. This type of investment always carries a higher risk. Therefore, such a strategy would require not only a large amount of money to be invested, allowing more opportunities to pick a successful investment while absorbing losses, but also a willingness to accept losses if they occur.
In practice, it is not advisable for financial advisors, fund managers and other financial service retailers to use the term ‘high-yield investment programme’. This is because the term is so strongly associated with scams that it carries negative connotations of its own. Those who try to claim the term for use in a legitimate context are likely facing a losing battle.
The negative use of high-yield investment programs covers a wide range of scams, most of which are variants of the Ponzi scheme. Such schemes claim to invest clients’ money and guarantee high returns. In reality, the return that is paid is not from investments, but rather from money raised from new investors to pay existing investors, with the operators of the scheme of course taking a cut of the money. As with any pyramid scheme, this has an inherent limitation. At some point, the new recruits dry up, meaning the scheme collapses, leaving existing investors out of pocket.
In general, the name “high-yield investment program” is used for schemes that claim to provide a return that is dramatically higher than that offered by even successful legitimate investment traders. The figures quoted are therefore figurative and literally too good to be true. Not all Ponzi or pyramid schemes are classified as high-yield investment programs, as some offer returns that are at least plausible, even if the supposed guarantee of a level of return is inherently false.
Smart Asset.
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